CBO: budget deficit to hit $1.5 trillion in 2011, 9.8% of GDP

The budget deficit will hit $1.5 trillion in 2011, or 9.8 percent of the GDP, according to estimates from the Congressional Budget Office (CBO).

The estimates assume that current laws remain unchanged.

In 2009, the deficit was $1.4 trillion, or 10.0 percent of GDP.In 2010, it was 1.3 trillion, or 8.9 percent of GDP.

The CBO cited sharply lower tax revenues and elevated stimulus spending as the causes for the ballooning budget deficit in the past two years.

For 2011, the deficit will widen because of the pace of recovery remains slow and President Obama's tax compromise with the Republicans both decreases tax revenues and increases spending.

Revenues are expected to be $123 billion, or 6 percent higher than 2009 levels. Revenue generated by income taxes, corporate taxes, and some other sources will increase by $200 billion; however, taxes from Social Security insurance will drop $70 billion as a part of Obama's tax compromise.

Mandatory spending (excluding TARP) is expected to increase by $191 billion, or 10 percent, from 2009 levels, mostly due to more spending on Social Security, Medicare, and Medicaid. Discretionary spending is estimated to be $137 billion more. Interest payments on debt will increase by $38 billion.

CBO noted that 2011's projected deficit-to-GDP percentage of 9.8 percent is almost 1 percentage point higher than the 2010 figure and roughly equal to the 2009 figure of 10.0 percent, the highest in 65 years.

President Obama, in last night's State of the Union address, acknowledged the budget deficit problem; he proposed a spending freeze that would save $400 billion over the next decade.

However, many Republicans and economists aren't impressed by the relatively small spending cut.

Nouriel Roubini, the economist who famously predicted the subprime mortgage crisis, said the U.S. will see a fiscal train wreck if it continues to spend out of control.

We're not doing much about the budget deficit, he said today on Bloomberg TV.